International Value-Added Linkages in Development Accounting
By Robert Zymek and Alejandro Cuñat
Abstract
We generalise the traditional development-accounting framework to an open economy setting. In addition to factor endowments and productivity, relative factor costs emerge as a source of real-income variation across countries. These are shaped by bilateral trade determinants (which underpin the patterns of “international value-added linkages”) and the global distribution of factor endowments and final expenditures. We use information on endowments, trade balances and value-added trade to back out the relative factor costs of 40 major economies in a theory-consistent manner. This reduces the variation in “residual” productivity required to explain the observed per-capita income differences by more than one half.
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